Fear Is Replacing Greed In Bitcoin

The 3-month and 6-month Bitcoin charts look ugly. The 12-month chart looks like a classic roller coaster (that is not a technical charting term AFAIK).

In speculative trading terms, I look at Bitcoin as a commodity (same as the IRS view) and I think that the speculative part of Bitcoin as a commodity is unrelated to Bitcoin as a currency (where all the matters is transaction volume) or the Blockchain part of bitcoin as a payment network (where all that matters is the quality of systems built on top of platforms such as Ethereum).

When I first looked at Bitcoin as an asset class for Wall Street, I came away with the conclusion that it was a lot like investing in seed stage tech ventures. You can paint a plausible scenario for a 10x or higher appreciation. You can paint an equally plausible scenario for losing everything or losing 90%, which is about the same (to get back that 90% loss you need a 10x win somewhere else).

The fear story is getting more prominent. The techniques for shorting Bitcoin are also becoming more commonplace. These two are surely connected.

The fear stories have morphed from “straw man arguments” that did not scare anybody who knew Bitcoin, to some arguments that actually do raise concerns even among those who are passionate about Bitcoin. In London last week, this article in City AM generated discussion among Bitcoin aficionados. The headline left no room for ambiguity on POV:

“Bitcoin is bust: Why investors should abandon the doomed cryptocurrency”

The author has intellectual credentials:

“Kevin Dowd is professor of finance and economics at Durham University and a partner in Cobden Partners. www.cobdenpartners.co.uk”

I came away from the article with three arguments:

1. There is no floor price. There is no price at which bargain-hunters jump in. This is like early stage tech stocks; if the valuation drops from $500m to $50m, it is probably not a bargain, it is probably heading to the deadpool. The Libertarian wing of the Bitcoin party would say, “ this is true for Fiat as well” and that is plausible in places like Zimbabwe and Venezuela. However Bitcoin as a tool in preppers bag is not plausible – they will stick to Gold “thank you very much”.   Actually I think there is a floor price for Bitcoin and that is the holdings of people who mined it when it was less than $1; they will keep some forever, because “why the hell not?” However that floor is so low that it is no consolation to somebody buying in at $300. Fear factor – very high if one of the other two is true.

2. The 51% attack. This seriously scares people who grew up in the Bitcoin world. It is easy to imagine. Ghash is for real. I am less concerned with this one, because there are large companies that have a vested interest in Bitcoin maintaining credibility as a currency and a payment network; they will throw money and server resources at the problem.

3. Mining moves to an oligopoly because the cost is so high. This is related to the 51% attack, but is actually a deeper problem in my opinion. A few big companies can prevent catastrophic failure due to a 51% attack by throwing money at the problem. However that will only exacerbate the oligopoly problem. We would be replacing trust in one set of oligopolistic players with another set of oligopolistic players. This is not the “Internet of money” that has everybody excited.

On balance, I think we have passed the point where Bitcoin will simply disappear or the price will crash to $30 or zero. That is not impossible, but I think it is unlikely. There is some degree of faith in that POV. I think that a lot of smart people are working this out and we will get to a technical solution. It maybe something to do with Sidechains, but I have not studied that enough yet to come to a conclusion.

The fear vs greed or bear vs bull dynamic is how markets work. This dynamic is good for Bitcoin as a currency and as a payment network. My best guess of Bitcoin’s future price is really boring. I think it will be pretty similar to today’s price. Short term there will be some volatility but this will slow down as speculators (including those shorting Bitcoin) take the opposite side of each trade. In other words, Bitcoin will become a lot more like Fiat currencies in terms of volatility. It won’t be like major currency pairs (e.g. USD/EUR) but more like trading exotic currencies in Africa and Emerging Asia.

So my headline is really boring:

“Bitcoin price will not be much different in future”

My Editor told me I would be fired for such a boring headline, so I inserted the one about fear and greed. Hooked you, huh?

This is a Fintech blog, not a Bitcoin blog. Normal programming will resume tomorrow. Bitcoin (Blockchain) is one tool for Fintech entrepreneurs, but Fintech is a lot more than Bitcoin. (For my series on Bitcoin, please click here).





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